The Labor Department announced Thursday that inflation ended 2022 in a small dip, with consumer prices falling in December for the first time since the pandemic began.
The consumer price index, which measures the cost of a wide range of goods and services, declined 0.1% for the month, as predicted by the Dow Jones. This was the highest month-over-month drop since April 2020, when much of the country was on lockdown due to Covid.
Despite the decline, headline CPI jumped 6.5% from a year earlier, showing the ongoing burden that rising living costs have imposed on American consumers. That was, however, the smallest yearly gain since October 2021.
Excluding volatile food and energy costs, core CPI grew 0.3%, in line with predictions. Core was up 5.7% year over year, which was in line with expectations.
The majority of the monthly fall was caused by a sharp drop in fuel prices. Pump prices fell 9.4% for the month and are currently down 1.5% year on year after rising beyond $5 per gallon in mid-2022.
Fuel oil fell 16.6% for the month, adding to a 4.5% drop in the energy index overall.
Food costs rose 0.3% in December, while shelter prices rose 0.8% for the month and are currently 7.5% higher than a year earlier. Shelter constitutes almost one-third of the total CPI index.
UsMotor car prices, another significant early driver of inflation, fell 2.5% in February and are now down 8.8% year on year. Medical care services grew 0.1% after falling for two months in a row, while fashion costs increased 0.5% and transportation services increased 0.2%, remaining 14.6% higher year on year. However, airline fares reduced 3.1% month over month but are still up 28.5% year over year.
Markets reacted little to the news, with stocks opening marginally lower and Treasury yields falling across most durations.
Both yearly growths are still significantly over the Federal Reserve’s 2% objective but have been steadily declining.
“Inflation is quickly moderating. Obviously, it’s still painfully high, but it’s quickly moving in the right direction,” Mark Zandi, chief economist at Moody’s Analytics, said. “I see nothing but good news in the report except for the top-line number: 6.5% is way too high.”
The CPI is the most closely followed inflation indicator since it considers changes in everything from a gallon of petrol to the cost of a dozen eggs and airline tickets.
The Federal Reserve uses a separate indicator that takes into account changes in consumer behavior. However, when evaluating inflation, the central bank considers a wide range of data, with CPI being one piece of the puzzle.
There was some evidence in the statistics that consumers’ behavior is changing. Along with that came a warning that the December reduction was mostly fueled by a drop in petrol prices, which may not be sustainable given market dynamics and consumer demand.
According to Simona Mocuta, chief economist at State Street Global Advisors, “We know that we won’t get the same kind of support from gasoline prices. So don’t expect the next report to look as good as this one. But the trend is favorable.”
Markets are keenly following the Fed’s moves as authorities face the highest inflation rate in 41 years. Supply chain bottlenecks, the Ukraine war, and trillions of dollars in fiscal and monetary stimulus all contributed to soaring prices in almost every sector of the economy.
Policymakers are contemplating how far they can go with interest rate rises to slow the economy and contain inflation. So far, the Fed has hiked its benchmark borrowing rate by 4.25 percentage points, raising it to its highest level in 15 years. Officials have stated that the rate is expected to approach 5% before they can assess the impact of policy tightening.
Following the release of the CPI report, market pricing indicated an enhanced likelihood that the Fed will approve a 0.25 percentage point rate rise on February 1. That would be another step back for the central bank, which authorized four successive 0.75 percentage point raises last year before slowing to a 0.5 percentage point increase in December.